Speech by SEC Staff:
Remarks Before the PLI Fourth Annual Institute on Securities Regulation in Europe

by

Alan L. Beller

Director, Division of Corporation Finance
U.S. Securities and Exchange Commission

London, England
December 6, 2004

I am very pleased to have this opportunity to open this, PLI's Fourth Annual Institute on Securities Regulation in Europe. Many people have worked hard to make the program a success. I would like to recognize the three co-Chairs, Ed Greene, Pat Kenajian and Chuck Nathan, all of whom I have known and admired for a very long time. I also want to thank Sandy Geller of PLI, with whom I have also worked for many years, for her invaluable contributions to the success of the program.

Over the next two days there will be many in-depth discussions of topics of international interest. In light of the detail and information that will follow, and since I get to go first, I thought I would focus my remarks on some general observations about global regulation, including in particular the SEC's approach.

This would be a good time to point out that, as a matter of policy, the SEC disclaims responsibility for remarks by the members of its staff. Therefore my remarks represent my own views and not necessarily those of the Commission or other members of the staff.

My interest in and experience with global regulation began long before I joined the SEC. I spent 25 years in private practice for a large international law firm, and for seven of those years I was stationed in Europe and Japan. So I have a first-hand view of how the regulations of various countries can affect companies and global markets.

Turning to the current subject, I have never seen more active discussion of global coordination of regulation than I've seen in the last two years. I believe that this is not just due to increasingly global markets, but also to a recognition of the advantages of a coordinated approach to serious shortcomings in accounting, financial and other disclosure and corporate governance. I'm not just talking about the poster children for fraud, from Enron to Parmalat. I'm talking about more widespread deficiencies - bad accounting, incomplete financial reporting, opaque disclosure - where investors deserve better.

In addition, the increasing prominence of the European Union in the regulation of financial markets has made it essential for national regulators all over the world to take a more global view of regulation. The progress that the EU has made in a relatively short time towards an integrated market and common standards of accounting and disclosure is very impressive.

In considering approaches to global regulation, as in all matters, we at the Commission start from our mission, which is to administer and enforce federal securities laws in order to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation. The U.S. securities laws and Commission regulations have predominantly involved regulation of disclosure, and historically the Commission has adopted a system of disclosure regulation that applies similar requirements to U.S. and non-U.S. issuers, to ensure that investors have comparable information about all companies trading in the U.S. markets and to keep a level playing field for all market participants. To the extent that the Commission has departed from this approach, it has been to make accommodations for non-U.S. issuers.

For example, non-U.S. issuers filing their annual reports on Form 20-F are given more time to submit those reports than are U.S. companies. While U.S. issuers are required to file quarterly reports, there are no SEC interim reporting requirements for these non-U.S. issuers. Rather they can in effect provide interim reports based on home country requirements. And in a step that is often forgotten, the SEC exempts non-U.S. issuers whose securities are not listed on U.S. exchanges or Nasdaq and that have made registered U.S. public offerings from registration and reporting requirements, even if they have passed the U.S. shareholder thresholds that require U.S. companies to register.

In matters that go beyond disclosure to, for example, corporate governance or internal corporate processes, the SEC historically has been more sensitive to the need to accommodate foreign structures and requirements and especially to avoid subjecting non-U.S. issuers to inconsistent or conflicting regulatory regimes. For example, since the 1930s the SEC has provided exemptions from the SEC's proxy rules and from the short-swing profit rules and reporting requirements related to trades by company insiders. And, as I will discuss later on, with the SEC's approval the corporate governance listing standards imposed by U.S. national securities exchanges and the Nasdaq have for the most part not been applied to non-U.S. issuers

Over the last two-and-a-half years, there has been significant attention paid to the treatment of non-U.S. issuers under the Sarbanes-Oxley Act of 2002. While the Sarbanes-Oxley Act does not provide an exemption for non-U.S. companies required to file reports with the SEC, in implementing the Act the SEC has been sensitive to the potential effects of the Act on non-U.S. issuers. Many of the provisions of the Sarbanes-Oxley Act relate to disclosure, and in those cases the Commission has generally followed its historical approach of similar treatment for U.S. and non-U.S. issuers, while giving additional time for non-U.S. issuers to comply in certain cases. In areas where internal corporate processes have been involved, the SEC has made accommodations that are consistent with the purpose of the Act, and has been particularly mindful of avoiding imposing requirements that could conflict with those of home jurisdictions or markets. Overall, although some may disagree, I think the results to date make clear that the SEC has worked hard to afford appropriate accommodations to non-U.S. companies.

Among the accommodations the SEC has made are:

New audit committee requirements that acknowledge "co-determination," statutory auditors and boards of auditors, as well as shareholder ratification of the selection of external auditors.

Exemptions from requirements for financial information that is not in accordance with generally accepted accounting principles for non-U.S. GAAP communications made outside the U.S., even where those communications reach the U.S.

Exemptions from the prohibition on loans to company insiders for non-U.S. banks, paralleling the exemptions for U.S. banks that was written into the statue.

As I'm sure you all know, we are in the course of implementing the final item of the Sarbanes-Oxley Act - the requirement under Section 404 of the Act that a company's management assess and report on internal control over financial reporting and that the company's auditors provide an audit report on internal control. We have heard from a number of both U.S. and non-U.S. companies about the timing and costs of these requirements.

To be sure, I believe that we at the SEC have understood both the importance and the challenges of this provision. The Commission initially proposed rules in this area in October 2002, even though the tight rulemaking timeframes of the other provisions of Sarbanes Oxley did not apply. The Commission adopted final rules with a lengthy transition period. We worked closely with the Public Company Accounting Oversight Board to facilitate their adoption of new up-to-date auditing standards. When the transition periods the Commission had initially provided looked as if they might not be sufficient, it extended those periods. It also provided additional time, until fiscal year-ends after July 15, 2005, for smaller U.S. companies and non-U.S. issuers filing their annual reports on Form 20-F. We at the SEC are concerned about companies' successful implementation of internal control reporting requirements, and a number of us, including Chief Accountant Don Nicolaisen and I, have been speaking out for well over a year to both issuers and auditors about the importance of starting early and carefully planning design and implementation activities for and devoting adequate resources to internal control reporting requirements.

I am not detailing our efforts to pat the SEC on the back, or to say "We told you so." Rather, I am trying to make the point that we have been constant in our determination to be attentive, flexible and sensible in making the implementation of the internal control reporting requirements successful. Our determination is evident in two recent steps addressed at accelerated filers - larger U.S. companies for whom the requirements will come into effect first. Last month, we deferred for one year the second step of the change in filing deadlines for accelerated filers, thereby providing an additional 15 days to all accelerated filers to complete their annual reports. Then, just last week the SEC and the PCAOB acted together to provide smaller accelerated filers, those with public float of $75 million to $700 million, an additional 45 days to complete their management and auditor work on internal control reporting. Also within the last several weeks, the staff of both the SEC and the PCAOB have been providing guidance, and the PCAOB staff in particular has provided guidance that seeks to avoid an overly prescriptive approach to audits of internal controls.

I am determined that we will be equally sensible when it comes to non-U.S. issuers. While our principal attention at the moment is devoted to U.S. accelerated filers, we are trying to stay informed about non-U.S. issuers as well. What I hear suggests to me that some companies and their auditors have started well and are working hard. Others are undoubtedly already behind. We appreciate that efforts in Europe are complicated by the fact that next year, when the first internal control reports are due, is also the first year for adoption of EU-wide accounting principles.

I believe that, after the provisions of the Sarbanes-Oxley Act that reorganize the auditing profession and its regulation, the internal control reporting requirements in Sarbanes Oxley have the potential to be the most important pieces of the Act in improving financial reporting. If that is correct, those that suggest that the internal control provisions and their implementation represent mere over-reaction by the U.S. Congress and then the U.S. regulators will be proven mistaken. In addition, those that state with certainty today that the costs outweigh the benefits cannot know. For one thing, while there has been plenty of comment about the costs, empirical studies that go back and examine both costs and benefits are premature, in fact impossible, at this time.

I would remind those who are so convinced that the costs in this area outweigh the benefits that much the same thing was said about other provisions of the Sarbanes-Oxley Act. For example, some said that the management time and other resources devoted to CEO and CFO certifications and the disclosure controls that support them were excessive. I think most objective observers would now agree that those provisions have focused necessary and salutary intention of top management on better disclosure, to the benefit of investors and markets, and that the costs have been justified.

At the moment our priority is to work towards the best and most efficient implementation that we can achieve. The future implementation for smaller U.S. companies and non-U.S. issuers will be informed by what we have learned and continue to learn in the process for accelerated filers. And we will continue to try to be sensible in taking steps that we believe will facilitate a successful implementation.

I have long thought that issuers seek to access the U.S. market, or any market, where it makes commercial sense. And where it does make sufficient commercial sense, regulatory issues are hurdles and not insurmountable obstacles. Nonetheless, starting almost on the date the Sarbanes-Oxley Act was enacted, some non-U.S. issuers have rethought plans to list in the U.S., or are considering de-listing, in order to avoid the compliance costs associated with the Act's requirements. Not surprisingly, currently the comments in this area focus on the costs and difficulties of compliance with internal control requirements. In this regard, some months ago eleven European corporate associations asked SEC to revise the deregistration standards for foreign issuers. Groups from the United Kingdom and Germany are currently in the process of approaching the SEC and perhaps others in the government to press the same matter.

We are not ignoring these requests, but are in the process of considering how the SEC should respond. In particular, a commitment to free and efficient markets should include mechanisms for issuers and securities to move into and out of markets. However, and very importantly, our fundamental investor protection mission requires that we provide standards for deregistration that protect U.S. investors. My own view is that standards that would look only to market access and not thresholds of ownership would raise investor protection concerns. These are not easy issues to balance, and we will not devise a solution overnight. But we are working on the matter.

I'd like to devote my remaining time to looking forward at some global issues. For every regulator there are advantages in starting from the premise of treating domestic and foreign issuers subject to its regulatory scheme similarly. Every regulator also recognizes that there are limits to not only the feasibility but also the desirability of that approach. In addition, common global or even cross-border systems of regulation where workable can promote market efficiencies.

In some cases progress can be made by relaxing national restrictions. The SEC has embarked on this path recently in two areas where disclosure and registration of securities offerings, and therefore my Division, are involved. First, last month the Commission proposed rules that would substantially relax restrictions on communications, especially written communications, in registered offerings and would also substantially streamline and update the registration process, particularly for the largest issuers. The proposals extend equally to U.S. and non-U.S. issuers and thus if adopted should substantially assist non-U.S. issuers who undertake registered offerings in the United States. At the same time the proposals would move SEC regulation of written offers closer to the general regulatory framework that applies in Europe and elsewhere.

Second, and less well-known but very important, the SEC has under consideration proposed rules for the asset-backed securities market. The rules if adopted in their proposed form would subject asset-backed transactions backed by non-U.S. assets to essentially the same registration and disclosure regime to which U.S.-based deals are subject, with additional disclosures about foreign legal, regulatory and other matters where material.

As a more general matter, however, harmonizing regulatory approaches presents many challenges. And it can be a laborious process. It is therefore not surprising that market participants and even regulators look for a quicker and more broadly applicable solution. There are those who suggest that mutual recognition, which is one of the approaches that the EU has sought among its member states and which is also an approach that the EU has suggested to the SEC and other U.S. regulators on some occasions, provides such a solution. Under a system of mutual recognition a company that complies with one set of regulations, for example those of its home jurisdiction, would be considered in compliance with regulations of another jurisdiction.

However, I believe that the ultimate feasibility of a system of mutual recognition rests in large part on equivalence or convergence of a general regulatory framework, although not necessarily on congruence of specific requirements. Implicit in my view is the belief that, while comity is an important element in designing a system of global regulation, it is not sufficient justification for mutual recognition. Some level of harmonization or equivalence in the regulatory framework must also exist. And mutual recognition can present other challenges. Even jurisdictions that share a commitment to a regulatory objective can have very different legal systems, market structures, economic systems and regulatory philosophies.

It follows that in my view the key to better coordination of global regulatory approaches in at least some areas is working at and achieving at least general levels of convergence. And there have been signal successes in efforts to do this.

A recent example, from 2003, involves the corporate governance listing standards adopted by the U.S. markets and approved by the SEC. The markets and the SEC were mindful of not forcing non-U.S. issuers into U.S. corporate governance molds. In particular, the corporate governance listing standards adopted by the U.S. markets last year generally do not impose on non-U.S. issuers the corporate governance requirements that are imposed on U.S. companies. Instead, these markets allow non-U.S. issuers to follow home market standards, but require disclosure of material differences between the home market and U.S. market standards. In effect, this "comply or explain" approach is a form of mutual recognition with an additional disclosure element.

Perhaps the most significant example of a successful venture in this area for issuers is the convergence project for disclosure that was undertaken under the aegis of the International Organization of Securities Commissions. Following its completion in the 1990s, a number of regulators, including the SEC, modified their regulations. In the SEC's case, it revised its disclosure requirements for non-U.S. issuers by amending its annual report form for foreign private issuers to adopt the IOSCO standards.

The best current example of efforts at convergence involves the work of the Financial Accounting Standards Board and the International Accounting Standards Board. I am extremely impressed by the work of the IASB in developing International Financial Reporting Standards. This important work continues, and I can only hope that the work of both the FASB and the IASB can be carried out to reach the best accounting solutions. Of course the ultimate goal of convergence in accounting standards is to have accounting principles and objectives that are generally the same. This would be a huge benefit to global markets.

A genuinely global accounting system also requires general convergence of auditing standards and adequate interpretive and enforcement mechanisms. These are daunting tasks, but in the last two to three years great progress has been made, largely through the efforts of European entities and institutions.

Success in these areas would set the stage for the Commission to conclude that it could eliminate its current requirement to reconcile IFRS as developed by the IASB to U.S. GAAP. We at the SEC are actively considering how to do this, including by following closely the development of IFRS. I am not willing to provide any version of a timetable. However, while the final decision of course rests with the Commission, I believe that if the commitment to, and progress in developing, high quality international accounting principles and auditing standards and sound interpretive and enforcement mechanisms continues, we will reach a point where reconciliation will no longer be required.

A key part of the process for the Commission today is to continue to closely observe the development and consequences of IFRS. While only about 50 non-U.S. companies registered with us currently use international standards, we expect that as a result of EU requirements that number will increase approximately ten-fold in 2005 (in filings we will see starting in early 2006). We are preparing to study those filings and hope to gain knowledge of IFRS through that process.

Even before true convergence of accounting standards is achieved, the move towards it is useful in making the reconciliation process easier. The SEC is also currently considering easing the transition to IFRS by proposing accommodations related to the first-time adoption of IFRS, which would generally allow companies that adopt IFRS to use the same years for their reporting to the SEC as they would use under IFRS.

I would also address one misconception. European companies have expressed concern that convergence means moving IFRS to U.S. GAAP, while U.S. companies have expressed concern that convergence means moving U.S. GAAP to IFRS. It is in fact a two-way street. We support the commitment of both the IASB and the FASB to select or develop the best quality standard in each case, regardless of its origin.

In closing, I would only emphasize the SEC's commitment to continuing coordination of regulation on a global basis and to the international dialogue that is essential to that process. I would also be remiss if I didn't note that as part of its ongoing commitment, the SEC has in place a number of initiatives designed to encourage offerings and listings in the U.S. by non-U.S. issuers. I encourage any company that may consider a U.S. offering or listing to contact the SEC staff in the Division of Corporation Finance at any stage in their consideration with any questions they might have.

Thank you again for inviting me to be here today with you. Time permitting, I would be pleased to take a few questions.